NPS National Pension Scheme- Retirement Planning

National Pension Scheme-NPS

NPS is a voluntary social security scheme launched to replace Old Pension Scheme. NPS focuses on building market linked retirement corpus.

The architecture of NPS is conceptualized on lines of 401(K) pension plan in USA.

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National Pension Scheme NPS

Why Retirement Planning?

You spend all your life in a organization, serving your duties and being financial independent. And then comes the tick of clock, notifying your retirement.

Post retirement, you need money, to spend on your health, to travel and to do things which you missed while serving a job. Where that money comes from? It comes either from another job or self business or from proper retirement planning.

Doing a job or business after retirement…???….Is it retirement??

Better way out is following a proper retirement plan.

To make your retirement comfortable, govt in 2004 has launched market linked National Pension Scheme.

DBPS vs DCPS(NPS)

Defined Benefit Pension System(DBPS) vs Defined Contribution Pension Scheme(DCPS)

In DBPS i.e. old pension scheme, the monthly pension of subscriber was decided on basis of last drawn salary. It was a major flaw of this scheme. As over a period of time, the cost of consumables increase but rise in subscribers monthly pension was not commensurate with it. As a result, subscriber’s purchasing power decreases slowly. Thus, pension so offered was unrealistic with respect to time.

On the other hand, govt was also burdened due to pensions. The advances in medical science, has led to increase average life expectancy, and retirement age didn’t increased at same rate. The exchequer i.e. Govt. started feeling burden of paying pension.

To shed away this responsibility on long run, and better financial management govt had come up Defined Contribution Pension Scheme (DCPS) i.e. National Pension Scheme (NPS).

Unlike DBPS which was available only to govt servants, NPS is a inclusive pension scheme where all residents and non-residents of India can contribute and plan their retirement.

What is NPS?

NPS is a voluntary retirement planning scheme.

Subscribers are allotted Permanent Retirement Account Numbers, where they make contributions to make individual retirement corpus.

Subscribers contribution are invested in market instruments through pension fund managers chosen by subscriber.

On retirement, subscriber has to convert minimum 40% of corpus in annuity for monthly pension and remaining amount can be withdrawn in lumpsum.

Advantages of NPS:

  1. Market linked low cost product, with market linked returns.
  2. Pension funds listed in NPS have very low expense ratio.
  3. Tax efficient, with tax breaks for individuals, employees and employers.
  4. Actively managed by professional fund managers.
  5. Voluntary (except mandatory contribution by govt employees), with limit of minimum Rs6000/- to be deposited every year to keep account active.
  6. Flexible- Subscriber chooses his pension fund manager out of many options. Subscriber also has provision for investment choices.
  7. Regulated- NPS is regulated by PFRDA, which have transparent norms for regular monitoring of fund managers.
  8. Tax exemption under section 80CCD(b) over and above the limit of Rs1.5lacs.

Regulatory Body:

Pension Fund Regulatory Authority i.e. PFRDA is the regulatory authority for NPS, created through an act of parliament.

PFRDA has appointed NSDL as Central Record Keeping Agency (CRA).

CRA Responsibility:

  1. Issue Permanent Account Number (PRAN) to each subscriber
  2. Maintain database of each subscriber.
  3. Provide customer service to subscribers.

How NPS works?

  1. Subscriber has to enroll for PRAN number either online or offline mode.In online mode, enrollment can be done at official website.
  2. On successful enrolment, CRA will provide Permanent Retirement Account Number (PRAN) will be allotted to the subscriber.
  3. Subscriber can contribute during his working life to create a retirement corpus.
  4. On retirement, the subscriber is required to invest some portion of corpus (min 40%) in annuity, rest of the amount can be withdrawn.
  5. On exit before retirement, the subscriber has to invest 80% in annuity and 20% can be withdrawn.
  6. Annuity investments are professionally managed and used to provide post retirement monthly pension.

Eligibility?

  1. Indian citizens (including NRI) in age group of 18-65years (as on date of submission of NPS application) can join NPS.
  2. In case of NRI’s, Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time.
  3. OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and HUFs are not eligible for opening of NPS account.

Account Restrictions:

  1. Only one account is allowed in name of individual.
  2. Subscribers PRAN is mapped to PAN. So if you try opening another account, the new account will not get approval. Either it wont allow you to open new account or the system will reject/close new account after some time.
  3. NPS account cannot be opened on name of a minor or on behalf of HUF.

Nomination Facility:

Nomination facility is provided in Tier I and Tier II account separately.

Subscriber is allowed to register up to three nominees in NPS.

A minor can be a nominee where subscriber will be required to provide guardian’s details and date of birth of the minor.

Category:

  1. Govt Sector:
  2. Central Govt.

All new employees of Central govt and Central Autonomous Bodies (except military services) who joined on or after 01.01.2004, are NPS subscribers mandatorily.

In mandatory scheme, the employee contributes towards NPS from its monthly salary, with equal contribution from the employer.

Mostly the mandatory contribution is 10% of Basic + DA.

  1. State Govt.

Some state govts have adopted and implemented NPS architecture through gazette notification, from different dates.

States where NPS is implemented, all the new employees of state govt services are mandatory subscribers of NPS.

They contribute towards NPS from their monthly salary with equal contribution from concerned employer.

  1. Private Sector (Non-Govt Sector):
  2. Corporate:

NPS Corporate Sector Model is the customized version of NPS to suit various organizations and their employees to adopt NPS as an organized entity within purview of their employer-employee relationship.

  1. All Citizens of India:

Any individual not being covered by any of the above sectors has been allowed to join NPS under the All Citizens of India sector from 01.05.2009.

Account Types:

There are two types of account in NPS, namely:

  1. Tier I Account – Mandatory
  2. Tier II Account – Voluntary

Unlike Tier I account, all investments made in Tier II account can be withdrawn any time.

Why you should opt for Tier II account:

  1. No additional annual maintenance Charge
  2. Saving for your day to day need (withdrawal at any point of time)
  3. Transfer fund to pension account ( Tier I) any time
  4. No minimum balance required
  5. No levy of exit load
  6. Separate Nomination facility available
  7. Option to select different Investment pattern from Tier I

Investment Choices:

Active Choice: Subscriber can select percentage contribution to different funds by himself. The asset class in active choice are:

  1. Equity or E- Max allocation 50%
  2. Corporate Debt or C
  3. Govt Securities or G
  4. Alternate Investment Funds or AIG-Max 5%

Auto Choice: Funds are allocated according to pre-defined matrix based on subscriber’s age. People with little or no knowledge of asset class, equity and etc can opt this choice. The portfolio is changes its weight age automatically with subscribers age. It works on the principal that with increase in age, risk appetite of subscriber decreases.

Tax Benefits:

Individual Subscriber:

Tax deduction up to 10% of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

Corporate Sector:

  1. Corporate Subscriber:
    Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer’s NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit.
  2. Corporates
    Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

Please note: Tax benefits are applicable for investments in Tier I account only.

There is no tax benefit on investment towards Tier II NPS Account.

  1. Partial Withdrawal:
    Partial withdrawal from NPS tier I account before the age of 60 for specified purposes. According to Budget 2017, amount withdrawn up to 25 percent of subscribers contribution is exempted from tax.
  2. Annuity purchase:
    Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.
  3. Lump Sum Withdrawal:
    On retirement at age of 60, up to 40 percent of the total corpus withdrawn in lump sum is exempt from tax.
    For example: If total corpus at the age of 60 is 10 lakhs, then 40% of the total corpus ie 4 lakhs, you can withdraw without paying any tax. So, if you use 40% of NPS corpus for lump sum withdrawal and remaining 60% for annuity purchase at the time of retirement, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax.

Contribution:

If you are an existing Subscriber, you can approach any POP-SP or alternatively you can visit eNPS website (https://enps.nsdl.com) for making contribution in your Tier I and Tier II accounts.

Guarantee of Returns:

The subscribers contribution is invested in market via pension fund managers. As returns from markets are not assured, so do the returns from NPS.

The other side of coin is, in long run, markets reflects economic condition of a country. If economic condition improves, markets also performs better, so do your invested capital. NPS investments for long run, in long run, markets always outperform any other mode of investment.

Good returns in time frame of 8-10 years are expected, though not guaranteed.

Job Change/Transfers?

Portability is one of the key features of NPS.

Online NPS services can be availed from anywhere in the world.

Offline NPS services, can be accessed from anywhere in the country irrespective of individual employment and location/geography.

This implies that you can switch from one sector to another, (Inter Sector Shifting) e.g. Central Government to Corporate sector, State Government to Central Government etc. and vice versa.

In case of relocation, you can also change POP-SP within the same POP or you can change to POP of your choice available to the location.

Exit/Withdrawal:

As per PFRDA (Exits & Withdrawals under NPS) Regulations 2015, in following conditions Subscriber can exit from NPS:

  1. Upon Superannuation – When a subscriber reaches the age of Superannuation/attaining 60 years of age, he or she will have to use at least 40% of accumulated pension corpus to purchase an annuity that would provide a regular monthly pension. The remaining funds can be withdrawn as lump sum.
    Note: For accumulated pension corpus less than or equal to Rs. 2 lakh, Subscriber can opt for 100% lumpsum withdrawal.
  2. Pre-mature Exit – Exit before attaining the age of superannuation/attaining 60 years of age, at least 80% of the accumulated pension corpus of the subscriber has to be utilized for purchase of an annuity that would provide a regular monthly pension. The remaining funds can be withdrawn as lump sum.

However, you can exit from NPS only after completion of 10 years.

Note: For accumulated corpus less than or equal to Rs. 1 lakh, Subscriber can opt for 100% lumpsum withdrawal.

3. On Death of Subscriber – The entire accumulated pension corpus (100%) would be paid to the nominee/legal heir of the subscriber.

This is it for now. Now, you will be able to understand the basics of NPS and invest in it. There are a lot more know how things left in NPS, it will cover them in other post.

Also visit Pensioners Portal.

You can check more safe investment options for salaried persons in this post of mine.

Find All about PPF.

Thanks.

 

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